TD Waterhouse in Merger Talks With Rival E-Trade

A combination of the online operations would form the second-largest U.S. discount broker, analysts say.

In what could be the final stage of its long hunt for a U.S. partner, Toronto-Dominion Bank said Tuesday that it was in talks to merge its U.S.-based TD Waterhouse online brokerage with discount rival E-Trade Financial Corp.

TD, which is Canada’s third-biggest bank, and E-Trade confirmed that they were “holding discussions with regard to a possible transaction,” but warned that there were no assurances the discussions would lead to an agreement.

Analysts said a combination of Waterhouse’s U.S. operations and E-Trade would form the second-biggest U.S. discount broker, trailing only San Francisco-based Charles Schwab Corp.

TD Waterhouse has about 2 million U.S. accounts, according to research firm Sandler O’Neill & Partners. E-Trade has about 2.9 million accounts.

In New York Stock Exchange trading, TD Bank shares gained $1.34 to a 52-week high of $35.10. E-Trade rose 36 cents to $13.78 on the NYSE, also a 52-week high. E-Trade, now based in New York, formerly had its headquarters in Menlo Park, Calif.

Analysts echoed the market’s approval of the news.

“On the surface, it would make a lot of sense. It would give [TD Waterhouse] national presence, rather than just regional,” said John Kinsey, portfolio manager at Caldwell Securities.

Speculation about a deal involving TD Waterhouse has been rampant in the financial world for months, with sources pegging E-Trade, Schwab and Ameritrade Holding Corp. as potential partners.

A report in Toronto’s Globe and Mail newspaper Tuesday said TD and E-Trade were close to a deal. Quoting sources familiar with the negotiations, the paper said TD Bank would hold 40% to 50% of the new company, making it the biggest shareholder. But E-Trade’s management would run the new brokerage.

TD Waterhouse, and the online brokerage industry in general, have benefited from a resurgence in activity by investors keen to participate in improving stock markets, making it a good time for such a merger, analysts said.

“It’s also good timing from the perspective of what may be happening here in Canada, and that is perhaps that bank mergers may be around the corner,” said Darko Mihelic, an analyst at Research Capital Corp.